· The dollar fell against the yen and the yuan weakened, in a sign investors remain wary that China’s currency policy has become a new flash point in its trade war with the United States.
The yuan eased against the dollar in offshore trade on Wednesday after the People’s Bank of China set its official midpoint not much firmer than its previous close.
China’s currency also opened weaker against the dollar in onshore trade.
“Escalation of U.S.-China trade frictions has deteriorated market sentiment, which will eventually make Treasury yields go lower and the yen go higher,” said Tohru Sasaki, head of Japan markets research at JP Morgan Securities in Tokyo.
“We still expect the dollar to rise to 7.35 yuan by the end of the year, which will make the U.S. administration very uncomfortable. I expect the dollar to fall to 104-103 yen by the end of the year.”
The dollar fell 0.3% to 106.13 yen in Asian trading. On Tuesday, the greenback rallied from a low of 105.51 yen to as high as 107.07 yen in a volatile session sparked by worries about China’s currency policy.
Revived concerns about trade frictions tend to push demand for the safe-haven yen higher.
The offshore yuan fell to 7.0701 per dollar, not far from 7.1397, the lowest since international trading in the currency began in 2010.
The onshore yuan opened trade at 7.0369 per dollar versus its last close at 7.0250.
The dollar index, which measures the greenback against six major currencies, was little changed on Wednesday at 97.474.
Prices on 10-year U.S. Treasuries, another safe asset, also rose in Asia, pushing yields down to 1.6888%, close to the lowest in almost three years.
The euro stood at $1.1202, flat so far in Asian trading.
· TRADE WARS ARE NOT EASY TO WIN: US-CHINA TENSIONS SPOOKING FINANCIAL MARKETS
US-China trade war tensions are dominating headlines, and pessimism about the two economic powerhouses reaching a resolution continues to fuel the biggest selloff in equity markets this year. Trade tensions were triggered last week after US President Donald Trump abruptly announced a 10 percent tariff against $300 billion worth of Chinese imports.
At the start of the week, USDCNH broke through the psychologically-significant 7.00 price level. The offshore-Yuan’s push past this
point according to the PBOC – China’s monetary authority – was the result of “tariff expectations [and] protectionism”. Mr. Trump promptly tweeted that USDCNH’s move past 7.00 was China’s attempt at “currency manipulation”.
Chinese companies are now halting their importation of US agricultural goods according to state-run media. Trump will likely retaliate because they have hit him where it hurts most ahead of the 2020 election: his core constituency. US farmers have been on the receiving end of retaliatory actions from China. On Monday, the US Treasury Department designated China as a currency manipulator, adding more fuel to the fire.
· USD/JPY: Bears attack 106.00 amid Treasury yields sell-off
The USD/JPY pair extends losses in Wednesday's Asian trading, mainly driven by the sell-off in Treasury yields and cautious trading in the Asian stocks amid a weaker Yuan setting.
The USD/JPY pair has spent most of the American session consolidating around the 23.6% retracement of its daily slide measured between 109.31 and the mentioned 105.51 low, and with its upward potential limited by the 107.00 region, as the pair not only topped for the day around the level, but it also has there the 38.2% retracement of the mentioned decline. In the 4 hours chart, the 20 SMA keeps limiting advances, heading south above the current level, while technical indicators stabilized within negative levels after correcting extreme oversold conditions. The risk remains skewed to the downside, although the slide would likely resume on a break below the 106.00 figure.
Support levels: 106.00 105.75 105.40
Resistance levels: 106.70 107.00 107.40
· The Australian Dollar surged higher against its G10 rivals Tuesday after the Reserve Bank of Australia (RBA) suggested it will wait for some time before cutting its interest rate again and as markets serenaded a record trade surplus for the month of June.
Australia's trade surplus came in at $8.04 bn for June, which is up 30% from the previous month and a new record high, according to the Australian Bureau of Statistics. This was the result of export growth as well as a decline in imports during the recent month.
· Agriculture has been a weapon of choice in the escalating trade war between the world’s two largest economies.
With China officially pulling out of buying U.S. agricultural products, American farmers are losing one of their biggest customers. It could be a devastating blow in an already tough year for crops and commodity prices. It may also dent U.S. gross domestic product and hurt companies like Deere, whose business is directly tied to farming in the Heartland.
China made up $5.9 billion in U.S. farm product exports in 2018, according to the U.S. Census. It’s the world’s top buyer of soybeans and purchased roughly 60 percent of U.S. soybean exports last year. Westhoff estimated that soybean prices have already dropped 9% since the trade war began last July.
Westhoff estimated an additional $4 billion drop on soybean exports after the effects of tariffs but before the total loss of China as a customer. Tariffs also have a ripple effect across other crops, he said. With less demand for soybeans, farmers end up planting more crops like corn. That results in lower corn prices because there’s much more supply.
Former Iowa Lt. Gov. Patty Judge said the loss of a trading partner like China sets up a “dangerous situation.”
“There are going to be some serious repercussions for farmers,” Judge said.
· The USDINR could reverse the dominant downtrend from October 2018 if trade tensions between the United States and India escalate in an already anxious market environment. On June 1, US President Donald Trumpended preferential treatment status for about $6b worth of goods purchased duty-free from India. This was partially as a result of aiming to reduce the nation’s trade deficit with the world.
Narendra Modi, India’s Prime Minister, retaliated on June 15 when he announced that the nation will be raising tariffs on 28 types of goods imported from the US. Items that are to be taxed include agricultural goods such as apples, almonds and walnuts. For reference, in the US-China trade war, the latter’s retaliation mainly targeted the former’s agricultural sector, a key segment of Trump’s supporters.
This could risk further retaliation from the world’s largest economy towards India and the latter seems more vulnerable to its tariffs. Looking at the chart below, India’s largest source of a positive net-export relationship is the US, dwarfing the second-largest, Nepal, by almost threefold (about 2.6 times bigger). Meanwhile, the US has a small trade deficit with India, at least relative to nations such as China, Mexico and Canada.
· The Reserve Bank of India on Wednesday cut interest rates for a fourth straight meeting in 2019, taking advantage of mild inflation to expand its effort to boost an economy growing at its slowest pace in nearly five years.
The RBI maintained its “accommodative” stance adding that addressing growth concerns by boosting aggregate demand was their highest priority now.
The six-member monetary policy committee (MPC) cut the repo rate by 35 basis points to 5.40%, slightly more than the 25 basis point cut predicted by 80% of the 66 analysts polled by Reuters last month.
The reverse repo rate was reduced to 5.15%.
· Oil prices dipped on Wednesday as potential damage to the global economy and fuel demand from the intensifying Sino-U.S. trade dispute continued to cast a shadow over the market.
International benchmark Brent crude futures LCOc1 were at $58.75 a barrel by 0642 GMT, down 19 cents, or 0.32%, from their previous settlement and trading near seven-month lows.
U.S. West Texas Intermediate (WTI) crude futures CLc1 were down 12 cents, or 0.22%, from their last close at $53.51 per barrel.
Brent prices have plunged more than 9% in the past week after U.S. President Donald Trump said he would slap a 10% tariff on a further $300 billion in Chinese imports starting on Sept. 1, sending global equity markets into a tailspin.
“Crude oil prices remained under pressure as investors grappled with the impact of the trade conflict,” ANZ bank said in a note.
Reference: CNBC, Reuters, Poundsterlinglive, DailyFX
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